At last week’s “pulse” auction - a mini-GDT held in between main auctions - whole milk powder traded at US$2450 a tonne.
HighGround Dairy consultant Stu Davison said the futures market may be anticipating higher demand when remaining tariffs on New Zealand dairy products come off from next January as part of the New Zealand-China Free Trade Agreement.
But, for the moment, he says the fundamentals point to more weakness.
“We know that Chinese inventories for whole milk powder and skim milk powder are really high,” Davison said.
“There is an expectation that New Zealand milk powder buyers will need to come back to the market eventually for their product, but there is no desire for them to come back in a hurry.
“So, from a fundamental standpoint, it’s pretty hard to be bullish, or even neutral, to be honest.
“My anticipation is that we are still going to see a decline at the GDT auction.
“If anything, it’s probably got worse in terms of the demand side.”
Fonterra has revised down its forecast milk collections for the 2023/24 season to 1465 million kilograms of milk solids from 1480m kilograms, and analysts said reduced supply may prompt a response on the GDT platform.
Fonterra chief executive Miles Hurrell, in an email to farmers, said there had been reports of some rebalancing of China’s domestic milk production.
“As these changes on the supply side play out, indications are demand for New Zealand product could start to return over calendar year 2024,” Hurrell said.
Fonterra cut its farmgate milk price twice last month. It now sits at a mid-point of $6.75/kg, well down from DairyNZ’s revised estimate of break-even - $7.51/kg.
The industry group says farmers could expect 12-18 months of reduced income due to the current poor state of the market.
Westpac senior agri economist Nathan Penny said he expected the market weakness to continue in the short term.
“We have pushed out when we expect prices to recover to late this year or early next year before we see a general recovery in prices,” Penny said.
“There is no quick fix in sight.
“This is a story that will play out over the next six to 12 months.”
Among New Zealand’s other major commodities - meat and logs - prices have also been weak, but exporters have had the benefit of a sharp fall in the New Zealand dollar to dull the pain somewhat.
The ANZ World Commodity Price Index fell for the third consecutive month, dropping 2.9 per cent.
“Dairy and lamb prices fell whilst slightly stronger prices were recorded for other food commodities”, said agricultural economist Susan Kilsby.
ANZ said global demand for dairy products is weak, led by softer demand from China.
At the same time, the supply of dairy products from New Zealand is lifting as cows come back into milk following calving.
“The extra seasonal supply is putting downward pressure on prices despite expectations that less milk will be produced this season than the previous one,” she said.
ASB Bank said there was room for more weakness in the New Zealand dollar, which last traded at around US59.5 cents.
“The NZ dollar can fall further from here, though experience shows it seldom falls as much as underlying commodity prices during commodity price easing cycles,” the bank said in a statement.
“As a commodity currency, shifts in the NZ dollar are correlated with moves in commodity prices. Falls in the NZ dollar spot rate are linked with the recent softening in dairy prices.
“The weaker China outlook is the key driver behind those softer prices, and [the] NZ dollar’s falls have mirrored a similar decline in the Chinese yuan over 2023.”
There is scope for the Kiwi to decline further given the weaker China and commodity outlooks, it said, adding the currency could hit US56c over the coming months.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
